Private Contracting and Corporate Governance: Evidence from the Provision of Tag-Along Rights in Brazil

34 Pages Posted: 8 Mar 2011

See all articles by Morten Bennedsen

Morten Bennedsen

INSEAD - Economics and Political Sciences; University of Copenhagen - Department of Economics

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance

Thomas Vester Nielsen

Lloyd George Management

Date Written: March 2011

Abstract

We identify two opposing effects of issuing equity with tag-along rights that secure an equal price in the event of a takeover. First, the anti-self dealing effect commits controlling owners to sell only to new owners that increase shareholder value. Second, the rent transfer effect shifts rents to existing unprotected minority owners. The institutional setting in Brazil’s stock market allows us to test this trade-off. We find that announcements of tag-along rights are associated with an average cumulative abnormal return of around 5%, and that the probability of issuing shares with tag-along rights increases with the cost of self-dealing and decreases in the share of existing unprotected minority investors. Overall, our analysis confirms that private contracting can mitigate the economic costs associated with the inadequate legal protection of investors in emerging markets.

Keywords: Private contracting, Corporate governance, Brazil, Emerging markets

JEL Classification: G32, G34, G38

Suggested Citation

Bennedsen, Morten and Nielsen, Kasper Meisner and Nielsen, Thomas Vester, Private Contracting and Corporate Governance: Evidence from the Provision of Tag-Along Rights in Brazil (March 2011). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1779845

Morten Bennedsen

INSEAD - Economics and Political Sciences ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5, Bygn 26
Copenhagen, 1353
Denmark

Kasper Meisner Nielsen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

A4.17 Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

Thomas Vester Nielsen

Lloyd George Management ( email )

Suite 3808
One Exchange Square Central
Hong Kong
Hong Kong

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